This is a guest post by John MacIntosh of SeaChange Capital Partners, a nonprofit firm that arranges collaborative growth capital funding for outstanding nonprofits.
By John MacIntosh
I joined SeaChange Capital Partners after a career in venture capital. In my experience on the inside, the venture capital market is a dynamic system where three key “actors” (managers, directors and funders) struggle through a fog of uncertainty with
- closely aligned interests (in terms of mission and time frame);
- a clear delineation of roles, rights and responsibilities; and
- transparency in communication.
The system is supported by trust, explicit contracts, underlying legal and accounting frameworks, and an ecosystem of accountants, lawyers, and intermediaries.
Viewed from the outside, this system has attractive features like “close monitoring”, “supportive funders”, “long-term commitments”, “clear metrics and measures”, “accountability”, and “rigorous due diligence”. Not surprisingly, a number of nonprofit organizations have tried transplanting some of these into their work.
Unfortunately, the transplanting strategy fails to appreciate that these things have emerged and are sustained in the venture capital market because of the more fundamental background context. As “emergent properties,” they cannot be successfully transplanted into the nonprofit world without certain enabling conditions. Moreover, these “things” are verbs describing the actors’ response to their environment, not nouns that can be picked up and used: due diligence is a process, not a checklist; reporting is a ongoing activity, not a “dashboard”; accountability is a function of accepting roles, rights and responsibilities, not something acquiesced to up front; etc.
An alternative to transplanting venture capital strategies to the nonprofit field would be to create – even if artificially and imperfectly – the background conditions that might enable these things to emerge.
Imagine that I’d like my $100 million foundation to function like a venture capital firm.
The transplanting strategy would be to study some leading venture firms, adopt their diligence checklists, investment agreements and dashboards, and exhort my team to “be more active”, “take the long-view” and “think like investors”.
An enabling strategy on the other hand recognizes that since venture capital practices have emerged as-needed to make equity investments, they might also emerge if my foundation were required to make as-equity-like-as-possible grants.
For example, I could construct bylaws limiting my foundation to ten grants each to be funded for twenty years (i.e. effectively perpetual) by the income from $10 million of assets; each grant could be ended early only if another funder took over the remaining obligation; and program officers would have incentives tied to the long-term (5-7 year) performance of grantees.
In response, my foundation might naturally begin to act more venture-like without any explicit directive to do so:
- We would be really careful about due diligence because of the limited number and long-term nature of our grants. We would try to find organizations with missions, values, leadership, directors, and co-funders that we felt confident about over the long-term;
- We would be wary of making grants without governance rights, such as a board seat, restrictions on changes in the mission or leadership, and limits on the growth of the funding base;
- We would be explicit about how to measure the “performance” of each grantee given the requirements of the incentive scheme.
Other features of venture capital might be less likely to emerge:
- Would nonprofits agree to be funded on our terms? Probably only if the funding was meaningful and they had developed real trust in our people. (So to get things done, we would need to behave.)
- Would a secondary market develop for our grants? How would funders reluctant to pay for “overhead” or “capacity building” feel about paying us for our right to make a series of “great” grants in the future? Would we really pay other funders to relieve us of the contractual obligation to make a series of grants to a poorly performing grantee? (Imagine the headlines written by the nattering nabobs of nonprofit negativity!)
- Would the incentive program allow for risk-taking? Would people stick around for 5-7 years? Would the inability to rotate grants leave the team bored and uninspired?
I am confident that enabling venture capital practices would be more successful than transplanting them—but I probably wouldn’t do it. In fact, it seems fanciful to voluntarily restrict my potential activities when the distinctive characteristic of philanthropy is freedom. (If you only have to give away 5%, why agree to do more? If you could otherwise rotate grants and change strategy, why not leave the option open? If measures are imperfect, why make them truly high stakes?)
Unfortunately game theory shows that when self-control and commitment are difficult, “bridge-burning” can be the only viable strategy. (Does anyone doubt these are problems in the nonprofit sector? I struggle with them every day.) Unfortunately, it takes courage, self-knowledge, and conviction about your goals, so I don’t expect a revolution any time soon. Most likely, for-profit practices will continue to be transplanted ad-hoc into often inhospitable terrain with mixed results. But hopefully, a few brave souls will burn some bridges and see what emerges.